Intro
In this article, we aim to demystify concept of gas and gas fees. We'll delve into what gas is, why it's integral to the Ethereum ecosystem, and how it directly influences the cost of transactions.
Understanding gas
Imagine Ethereum as a massive amusem*nt park, and each transaction or smart contract you wish to execute as an individual ride within this park. Just like you need tickets for rides in an amusem*nt park, you need "gas" to carry out operations on the Ethereum network.
Just as each ride in an amusem*nt park requires a certain number of tickets, each operation on the Ethereum network requires a specific amount of computational work. This work is measured in units of "gas." Simple operations, akin to a gentle merry-go-round, require fewer tickets, or less gas units. On the other hand, complex operations like executing a smart contract are similar to intricate roller coaster rides, demanding more tickets, or equivalently, more gas units.
The concept of gas in Ethereum is akin to the ticketing system in an amusem*nt park. It helps maintain a fair environment where everyone pays for the amount of computational 'fun' they wish to have. Every operation requires a different amount of gas, just as different rides require varying numbers of tickets.
❗️It is important to remember: Just like an amusem*nt park ticket, once used, it cannot be returned. Whether an operation succeeds or fails, the gas is consumed because the computational resources have been employed.
What is Gas fee
Now that we understand what gas is in the context of our amusem*nt park analogy, let's examine how gas fees work.
In an amusem*nt park, you would typically purchase tickets in exchange for money. Similarly, in Ethereum, you pay for the gas using a specific amount of Ether. However, unlike a fixed price amusem*nt park ticket, the cost of these gas units can fluctuate depending on certain factors, such as network congestion. This is where the concept of gas fees comes in.
Gas fee is the cost of a single gas unit. Each time your transaction executes, Ethereum multiplies the consumed gas units by the gas fee and charges it to your wallet. If you don't have enough Eth in your wallet, the transaction will fail.
Gas fee is a composite value that consists of three components: base fee, priority fee, and max fee. To understand how it is calculated, let us explain each of these components.
These three elements - base fee, priority fee, and max fee - work together to determine how gas units are converted into Ether, and subsequently, the cost of transactions on the Ethereum network. So the cost per gas unit is calculated by following formula:
Gas fee = base fee + priority fee But wait. what about max fee?
Since the base fee can fluctuate based on network load, it's advisable to avoid overpaying for a transaction, especially if you're not in a hurry to execute it. To do so, you can set a max fee as a cap for the gas fee you're willing to pay when submitting your transaction. If, at the time of submission, the sum of the current base fee and the priority fee you've chosen exceeds this max fee, your transaction will not be immediately included in a block. Instead, it'll reside in the mempool, Ethereum's holding area for valid transactions that haven't been processed yet. Your transaction will only be included in a block when the base fee drops sufficiently so that the total gas fee (base fee + priority fee) is less than or equal to the max fee you specified.
While the gas fee isn't directly composed of the max fee, this component plays a crucial role in controlling the total payable gas fee. For simplifying our understanding, we can express the relationship between these components in a pseudo-formula. It is important to note that this is not an exact mathematical equation, but rather an illustration of the logical process that determines the gas fee:
Gas fee = min(base fee + priority fee, max fee) Essentially, it means that the gas fee charged for the transaction will be the lesser of these two amounts. This pseudo-formula demonstrates how the max fee operates as a safeguard, preventing users from paying more than their specified maximum, even if the sum of the Base Fee and Priority Fee is higher at the time of transaction processing.
👉 Fun fact: when a validator includes a transaction in a block, they only receive a priority fee as an incentive. The base fee is burned, or removed from the total supply of Ether, in order to combat inflation within the Ethereum network and provide a predictable level of transaction fees. By burning the base fee, the supply of Ether decreases with every transaction, which can help offset the new Ether created with each block (block rewards) and counteract inflationary pressures. This mechanism introduces a deflationary aspect into Ethereum's tokenomics.
Gas fee units
While we previously mentioned that fees are paid in Ether (ETH), Ethereum actually utilizes fractional units of Ether for these transactions, primarily because the fees are often quite small. These fractional units each have their own names, including wei, gwei, szabo, and finney.
Gas fees, in particular, are denoted in a unit of Ether known as "gwei." The term "gwei" stands for gigawei, which is equivalent to 1,000,000,000 wei. The smallest unit of Ether is called "wei", named after the creator of b-money, Wei Dai. Thus, each gwei is equivalent to 0.000000001 Ether, or 10^-9 Ether.
Therefore, when you come across a gas price of, say, 50 gwei, it signifies that each unit of gas is priced at 0.000000050 Ether. Importantly, the final transaction fee (expressed in Ether) is calculated by multiplying this gas price by the total amount of gas required for the transaction.
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To illustrate, consider a simple Ether transfer, which typically requires 21,000 gas units. If the gas price is set at 50 gwei, the total transaction cost would be 21,000 gas units multiplied by 50 gwei, which equals 1,050,000 gwei, or equivalently, 0.00105 Ether.
Gas Limit
When initiating a transaction on the Ethereum network, there are several key parameters that need to be specified. These include the priority fee, max fee, and a critical parameter known as the gas limit
The gas limit refers to the maximum amount of gas that you are willing to spend on a particular transaction. It essentially sets a cap on the computational effort that can be expended in processing the transaction. This is crucial because each operation within the Ethereum network, from simple transfers to the execution of complex smart contracts, requires a certain amount of computational work.
By setting a gas limit, you are essentially telling the network, "This is the maximum amount of work I am willing to pay for to have this transaction processed." It serves as a safeguard, ensuring that you don't end up spending more on transaction fees than you are willing or able to afford.
If you set the gas limit too low, your transaction may not have enough gas to be completed, and will therefore fail. On the other hand, if the transaction requires less gas than the limit you set, the unused gas will be refunded to you. However, it's crucial to set a realistic gas limit that's neither too low (which could result in failed transactions) nor excessively high (which could lead to unnecessary spending).
The gas limit hence plays a vital role in managing transactions and their associated costs within the Ethereum network, giving users control over their expenditure while also ensuring that the network's resources are efficiently utilized.
❗️If a transaction fails due to running out of gas (because the gas limit set for the transaction was too low), the user will still be charged for the gas that was already consumed
Determining Transaction Cost
Having explored the concepts of Ethereum gas and fees, we can now piece together the puzzle and delve into how the transaction cost is determined on the Ethereum network.
Three important parameters come into play: priority fee, max fee, and gas units. The cost of a transaction is calculated with the formula:
Cost = (base fee + priority fee) * gas units Gas units encapsulate the computational work required for executing a transaction. A simple Ether transfer, for instance, typically consumes about 21,000 gas units. Let's take an example where the base fee is 50 gwei and the priority fee is 2 gwei. The cost of this Ethereum transfer would be:
Cost = (50 gwei base fee + 2 gwei priority fee) * 21,000 gas units = 1,092,000 gwei (or 0.001092 Ether) However, gas consumption for transactions involving smart contracts can be unpredictable, given their complex if-then logic. The final cost is known only once the transaction has been processed.
To safeguard against excessive spending, especially when uncertain about how the contract works, it's advisable to set a gas limit. This represents the maximum amount of gas you're willing to spend on the transaction, effectively ensuring that you neither set too low a limit (resulting in a failed transaction) nor an excessively high one (leading to overspending). The gas limit thus proves an essential tool in managing your Ethereum transactions effectively.
Streamlining Gas Fee Management
In efforts to improve user experience and enhance the accuracy of gas settings, wallet services like MetaMask have revamped their gas user interface. The wallet UI, simplifies the gas estimation process by introducing intuitive iconography. Gas estimates are now categorized into 'low' 🐢, 'market' 🦊, and 'aggressive' 🦍, providing users with an easy-to-understand representation of their transaction speed and relative cost.
Moreover, MetaMask has also simplified the process of setting the max fee and the priority fee, removing the need for mathematical calculations on the user's end. Advanced settings can be set as the default, streamlining the process for users with custom gas strategies or those participating in high-demand events like NFT drops.
These changes make it easier for users to understand the current gas status, adjust their fees according to market fluctuations, and manage their transaction costs more efficiently, ultimately improving their interaction with the Ethereum network.
